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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________to________
Commission File Number: 001-39748
PUBMATIC, INC.
(Exact name of registrant as specified in its charter)
Delaware20-5863224
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
Not applicableNot applicable
(Address of principal executive offices)(Zip Code)
Not applicable
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Class A common stock, $0.0001 par value per sharePUBMThe Nasdaq Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 1, 2023, the registrant had 41,603,870 shares of Class A common stock outstanding and 9,158,315 shares of Class B common stock outstanding.


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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PUBMATIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par values)
September 30,
2023
December 31,
2022
(unaudited)
ASSETS
Current assets
Cash and cash equivalents$97,730 $92,382 
Marketable securities73,623 82,013 
Accounts receivable, net 291,385 314,299 
Prepaid expenses and other current assets11,634 14,784 
Total current assets474,372 503,478 
Property, equipment and software, net61,915 71,156 
Operating lease right-of-use assets21,768 26,206 
Acquisition-related intangible assets, net6,259 8,299 
Goodwill29,577 29,577 
Deferred tax assets14,659 1,047 
Other assets, non-current4,436 2,412 
TOTAL ASSETS$612,986 $642,175 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable$273,169 $277,414 
Accrued liabilities25,031 18,936 
Operating lease liabilities, current5,667 5,676 
Total current liabilities303,867 302,026 
Operating lease liabilities, non-current16,809 20,915 
Other liabilities, non-current3,736 7,046 
TOTAL LIABILITIES324,412 329,987 
Commitments and contingencies (Note 9)
Stockholders' equity
Preferred stock, $0.0001 par value per share, 10,000 shares authorized as of September 30, 2023 and December 31, 2022; No shares issued and outstanding as of September 30, 2023 and December 31, 2022
  
Common stock, par value $0.0001 per share; 1,000,000 Class A shares authorized as of September 30, 2023 and December 31, 2022; 44,682 shares issued and 42,034 shares outstanding as of September 30, 2023; 43,452 shares issued and outstanding as of December 31, 2022; 1,000,000 Class B shares authorized as of September 30, 2023 and December 31, 2022; 12,314 shares issued and 9,174 shares outstanding as of September 30, 2023; 12,393 shares issued and 9,253 shares outstanding as of December 31, 2022
6 6 
Treasury stock, at cost; 5,788 and 3,140 shares as of September 30, 2023 and December 31, 2022, respectively
(50,804)(11,486)
Additional paid-in capital221,205 195,677 
Accumulated other comprehensive loss(12)(9)
Retained earnings118,179 128,000 
TOTAL STOCKHOLDERS’ EQUITY$288,574 $312,188 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$612,986 $642,175 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PUBMATIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Revenue$63,677 $64,500 $182,414 $182,084 
Cost of revenue26,091 21,591 75,021 58,557 
Gross profit37,586 42,909 107,393 123,527 
Operating expenses:
Technology and development6,634 5,080 19,881 14,928 
Sales and marketing19,513 16,087 62,450 50,755 
General and administrative(1)
12,010 12,120 43,439 33,847 
Total operating expenses38,157 33,287 125,770 99,530 
Operating income (loss)(571)9,622 (18,377)23,997 
Interest income2,246 596 6,313 1,044 
Other income (expense), net210 (5,494)(476)(4,389)
Income (loss) before income taxes1,885 4,724 (12,540)20,652 
Provision for (benefit from) income taxes111 1,398 (2,719)4,728 
Net income (loss)$1,774 $3,326 $(9,821)$15,924 
Basic net income (loss) per share of Class A and Class B stock$0.03 $0.06 $(0.19)$0.31 
Diluted net income (loss) per share of Class A and Class B stock$0.03 $0.06 $(0.19)$0.28 
Weighted-average shares used to compute net income (loss) per share attributable to common stockholders:
Basic51,638 52,436 52,132 52,169 
Diluted55,979 56,944 52,132 56,895 

(1)Amounts for the nine months ended September 30, 2023 include a provision for bad debt of $5.7 million relating to a Demand Side Platform (“DSP”) buyer of our platform that filed for Chapter 11 bankruptcy.
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PUBMATIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Net income (loss)$1,774 $3,326 $(9,821)$15,924 
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, net of tax$20 $166 (3)(185)
Comprehensive income (loss)$1,794 $3,492 $(9,824)$15,739 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PUBMATIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
(Unaudited)
Common StockTreasury
Stock
Additional
Paid-In Capital
Accumulated Other
Comprehensive Income (Loss)
Retained
Earnings
Total
Stockholders’ Equity
SharesAmount
Balance as of December 31, 202252,705 $6 $(11,486)$195,677 $(9)$128,000 $312,188 
Stock-based compensation— — — 7,606 — — 7,606 
Exercise of stock options109 — — 314 — — 314 
Repurchase of shares(587)— (7,898)— — — (7,898)
Issuance of common stock related to RSU vesting96 — — — — — — 
Other comprehensive income— — — — 17 — 17 
Net loss— — — — — (5,871)(5,871)
Balance as of March 31, 202352,323 6 (19,384)203,597 8 122,129 306,356 
Stock-based compensation— — — 7,924 — — 7,924 
Exercise of stock options281 — — 623 — — 623 
Repurchase of shares(999)— (15,582)— — — (15,582)
Issuance of common stock related to employee stock purchase plan65 — — 971 — — 971 
Issuance of common stock related to RSU vesting272 — — — — — — 
Other comprehensive loss— — — — (40)— (40)
Net loss— — — — — (5,724)(5,724)
Balance as of June 30, 202351,942 6 (34,966)213,115 (32)116,405 294,528 
Stock-based compensation— — — 7,817 — — 7,817 
Exercise of stock options78 — — 273 — — 273 
Repurchase of shares(1,062)— (15,838)— — — (15,838)
Issuance of common stock related to RSU vesting250 — — — — — — 
Other comprehensive income— — — — 20 — 20 
Net income— — — — — 1,774 1,774 
Balance as of September 30, 202351,208 $6 $(50,804)$221,205 $(12)$118,179 $288,574 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Common StockTreasury
Stock
Additional
Paid-In Capital
Accumulated Other
Comprehensive Loss
Retained
Earnings
Total
Stockholders’ Equity
SharesAmount
Balance as of December 31, 202151,855 $6 $(11,486)$169,401 $(36)$99,295 $257,180 
Stock-based compensation— — — 5,469 — — 5,469 
Exercise of stock options131 — — 481 — — 481 
Issuance of common stock related to RSU vesting25 — — — — — — 
Other comprehensive loss— — — — (203)— (203)
Net income— — — — — 4,779 4,779 
Balance as of March 31, 202252,011 6 (11,486)175,351 (239)104,074 267,706 
Stock-based compensation— — — 5,780 — — 5,780 
Exercise of stock options96 — — 357 — — 357 
Issuance of common stock related to employee stock purchase plan142 — — 2,402 — — 2,402 
Issuance of common stock related to RSU vesting90 — — — — — — 
Other comprehensive loss— — — — (148)— (148)
Net income— — — — — 7,819 7,819 
Balance as of June 30, 202252,338 6 (11,486)183,890 (387)111,893 283,916 
Stock-based compensation— — — 4,973 — — 4,973 
Exercise of stock options78 — — 222 — — 222 
Issuance of common stock related to RSU vesting93 — — — — — — 
Other comprehensive income— — — — 166 — 166 
Net income— — — — — 3,326 3,326 
Balance as of September 30, 202252,509 $6 $(11,486)$189,085 $(221)$115,219 $292,603 



The accompanying notes are an integral part of these condensed consolidated financial statements.
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PUBMATIC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended September 30,
20232022
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)$(9,821)$15,924 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization33,731 23,587 
Unrealized loss and impairment of equity investment
 5,948 
Stock-based compensation21,525 15,182 
Provision for doubtful accounts5,675  
Deferred income taxes(14,185)(3,949)
Accretion of discount on marketable securities(3,061)(170)
Non-cash operating lease expense4,605 4,292 
Other3 98 
Changes in operating assets and liabilities:
Accounts receivable8,367 12,626 
Prepaid expenses and other assets3,501 (1,354)
Accounts payable4,141 4,013 
Accrued liabilities3,214 (4,806)
Operating lease liabilities(4,282)(3,985)
Other liabilities, non-current (966)448 
Net cash provided by operating activities52,447 67,854 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment(5,424)(26,961)
Capitalized software development costs(13,725)(9,597)
Purchases of marketable securities(76,932)(100,113)
Proceeds from sales of marketable securities18,873  
Proceeds from maturities of marketable securities69,500 63,200 
Business combination, net of cash acquired (28,085)
Net cash used in investing activities(7,708)(101,556)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock for employee stock purchase plan971 2,402 
Proceeds from exercise of stock options1,210 1,060 
Principal payments on finance lease obligations(93)(88)
Payments to acquire treasury stock(41,479) 
Net cash provided by (used in) financing activities(39,391)3,374 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS5,348 (30,328)
CASH AND CASH EQUIVALENTS - Beginning of period92,382 82,505 
CASH AND CASH EQUIVALENTS - End of period$97,730 $52,177 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid$11,518 $7,564 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION:
Stock-based compensation capitalized as internal-use software costs$1,822 $1,040 
Property and equipment included in accounts payable and accrued liabilities$1,229 $7,550 
Capitalized software costs included in accounts payable and accrued liabilities$2,287 $1,491 
Business combination purchase consideration - indemnification claims holdback$2,148 $2,597 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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PUBMATIC, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Description of Business
PubMatic, Inc. (together with its subsidiaries, the “Company” or “PubMatic”) was founded in 2006. The Company has offices in California, New York, Europe, Asia, and Australia. The Company provides a specialized cloud infrastructure platform that enables real-time programmatic advertising transactions. The purpose-built technology and infrastructure provides superior outcomes for both publishers and advertisers leveraging an efficient design, machine learning, and data processing capabilities, with customer alignment and global omnichannel reach.
Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
Fiscal Year
The Company’s fiscal year ends on December 31, and its fiscal quarters end on March 31, June 30, September 30, and December 31. References to fiscal year 2023, for example, refer to the fiscal year ending December 31, 2023.
Unaudited Interim Condensed Consolidated Financial Information
The unaudited condensed consolidated financial statements include the accounts of PubMatic, Inc. and its wholly owned subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and following the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by GAAP can be condensed or omitted. These financial statements have been prepared on the same basis as the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of the Company’s financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2023 or for any other interim period or for any other future year. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC on February 28, 2023 (the “Annual Report”).
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with GAAP. The accompanying condensed consolidated financial statements include the accounts of PubMatic, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior period amounts reported in our condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses.
The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate. Actual results could materially differ from those estimates and assumptions. Due to the inherent uncertainty involved in making assumptions and estimates, events and changes in circumstances arising after September 30, 2023, may result in actual outcomes that differ from those contemplated by the Company’s assumptions and estimates.
Impairment of Equity Investment
During the three months ended September 30, 2022, the Company concluded there was no longer a readily determinable fair value for its equity investment because the shares of the issuer were no longer publicly quoted pursuant to SEC Rule 15c2-11. The Company evaluated the measurement guidance for non-marketable equity securities and performed a qualitative assessment of various impairment indicators and concluded the equity investment was impaired as of September 30, 2022. As a result, the Company recognized an impairment loss equal to the difference between the fair value of the investment and its carrying amount. An impairment charge of $6.4 million was recorded within other income (expense), net in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022.
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Concentration of Revenue and Accounts Receivable
The Company defines its revenue concentration based on revenue recognized from individual publishers. For the three months ended September 30, 2023 and 2022, one publisher represented less than 10% and 13%, respectively, and less than 10% and 13% for the nine months ended September 30, 2023 and 2022, respectively, of the Company’s revenue. As of September 30, 2023, two buyers accounted for 32% and 18%, respectively, of accounts receivable. As of December 31, 2022, three buyers accounted for 33%, 15%, and 11%, respectively, of accounts receivable.
Accounts Receivable and Allowance for Credit Losses
Accounts receivable are recorded at the invoiced amount, are unsecured, and do not bear interest. The allowance for credit losses is based on the best estimate of the amount of probable credit losses in existing accounts receivable. The allowance for credit losses is determined based on historical collection experience and the review in each period of the status of the then outstanding accounts receivable, while taking into consideration current customer information, collection history, and other relevant data. Account balances are written off against the allowance when the Company believes it is probable the receivable will not be recovered.
The following table presents the changes in the allowance for credit losses (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Allowance for credit losses, beginning balance$14,845 $1,765 $1,765 $1,765 
Increase in provision for expected credit losses14,547
Write-offs(1,467)
Allowance for credit losses, ending balance$14,845 $1,765 $14,845 $1,765 
During the nine months ended September 30, 2023, the provision for expected credit losses associated with accounts receivable increased by $14.5 million relating to uncollectible receivables for a DSP buyer of the Company’s platform that filed for Chapter 11 bankruptcy on June 30, 2023. Of the total uncollectible receivables from the DSP buyer of $14.5 million, $8.8 million was subject to chargeback to publishers of the Company and recorded as contra payable to publishers related to expected recoveries. The result was $5.7 million of bad debt expense for the nine months ended September 30, 2023.
Recently Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires contract assets and contract liabilities acquired in a business combination to be recognized and measured in accordance with Topic 606, Revenue from Contracts with Customers, as if the acquirer had originated the contracts. Under previous GAAP, such assets and liabilities were recognized by the acquirer at fair value on the acquisition date. The Company adopted ASU 2021-08 as of January 1, 2023. The adoption of ASU 2021-08 did not have a material impact on the Company’s condensed consolidated financial statements.
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Note 3 – Fair Value Measurements
The following tables set forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):
September 30, 2023
Level 1Level 2Level 3Total
Financial Assets
Money market funds$67,344 $ $ $67,344 
Certificates of deposit 11,960  11,960 
Cash equivalents67,344 11,960  79,304 
Commercial paper 38,903  38,903 
Agency debt securities 14,906  14,906 
U.S. Treasury and government debt securities 19,814  19,814 
Marketable securities 73,623  73,623 
Total financial assets$67,344 $85,583 $ $152,927 
December 31, 2022
Level 1Level 2Level 3Total
Financial Assets
Money market funds$48,884 $ $ $48,884 
Certificates of deposit 4,169  4,169 
Cash equivalents48,884 4,169  53,053 
Commercial paper 63,483  63,483 
Agency debt securities 5,778  5,778 
U.S. Treasury and government debt securities 12,752  12,752 
Marketable securities 82,013  82,013 
Total financial assets$48,884 $86,182 $ $135,066 
The Company’s financial assets consist of Level 1 and 2 assets. The Company had no Level 3 assets or liabilities for the periods presented. The Company classifies its cash equivalents and marketable securities within Level 1 or Level 2 because they are valued using either quoted market prices or inputs other than quoted prices which are directly or indirectly observable in the market, including readily-available pricing sources for the identical underlying security which may not be actively traded. The Company’s fixed income available-for-sale securities consist of high quality, investment grade securities from diverse issuers. The valuation techniques used to measure the fair value of the Company’s marketable securities were derived from non-binding market consensus prices that are corroborated by observable market data and quoted market prices for similar instruments.
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Note 4 – Balance Sheet Components
Marketable Securities
The following tables summarize the Company’s marketable securities by significant investment categories (in thousands):
September 30, 2023
Amortized CostUnrealized GainUnrealized LossFair Value
Commercial paper$38,903 $ $ $38,903 
Agency debt securities14,911  (5)14,906 
U.S. Treasury and government debt securities19,821 2 (9)19,814 
Total$73,635 $2 $(14)$73,623 
December 31, 2022
Amortized CostUnrealized GainUnrealized LossFair Value
Commercial paper$63,483 $ $ $63,483 
Agency debt securities5,762 17  5,779 
U.S. Treasury and government debt securities12,777 2 (28)12,751 
Total$82,022 $19 $(28)$82,013 
The remaining contractual maturity of all marketable securities was within one year as of September 30, 2023 and December 31, 2022. Realized gains and losses were not material for the nine months ended September 30, 2023 and 2022. As of September 30, 2023 and 2022, there were no securities that were in an unrealized loss position for more than twelve months.
Property, Equipment and Software, Net
Property, equipment and software, net consisted of the following (in thousands):
September 30,
2023
December 31,
2022
Internal-use software$56,859 $40,794 
Network hardware, computer equipment and software134,066 129,212 
Leasehold improvements4,773 4,026 
Furniture and fixtures2,250 2,087 
Property, equipment and software, gross197,948 176,119 
Less: accumulated depreciation and amortization(136,033)(104,963)
Total property, equipment and software, net$61,915 $71,156 
Depreciation and amortization expense related to property, equipment, and software (excluding amortization of internal-use software) was $7.2 million and $6.4 million for the three months ended September 30, 2023 and 2022, respectively, and $21.8 million and $16.3 million for the nine months ended September 30, 2023 and 2022, respectively.
The Company capitalized $5.0 million and $3.5 million in software development costs during the three months ended September 30, 2023 and 2022, respectively, and $15.9 million and $10.3 million for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense of internal-use software was $3.8 million and $2.6 million during the three months ended September 30, 2023 and 2022, respectively, and $9.9 million and $7.2 million for the nine months ended September 30, 2023 and 2022, respectively. These costs are included within cost of revenue in the condensed consolidated statements of operations.
The Company did not recognize any impairment charges on its long-lived assets during the nine months ended September 30, 2023 and 2022, respectively.
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Accounts Payable
Accounts payable consisted of the following (in thousands):
September 30,
2023
December 31,
2022
Payable to publishers$249,221 $266,506 
Trade and other payables23,948 10,908 
Total accounts payable$273,169 $277,414 
Accrued Liabilities
Accrued liabilities consisted of the following (in thousands):
September 30,
2023
December 31,
2022
Accrued compensation$15,282 $14,587 
Accrued and other current liabilities9,749 4,349 
Total accrued liabilities$25,031 $18,936 
Note 5 – Senior Secured Credit Facilities Agreement
On October 17, 2022, the Company entered into a Senior Secured Credit Facilities Credit Agreement (the “Credit Agreement”) with the several lenders parties thereto (the “Lenders”), and Silicon Valley Bank (“SVB”), as administrative agent, lead arranger, issuing lender, and swingline lender. The Credit Agreement matures on October 17, 2027.
The Credit Agreement provides a revolving credit facility in an aggregate principal amount of $110.0 million (“the Revolving Credit Facility”), including a $25.0 million letter of credit sub-facility and a $25.0 million swingline sub-facility. The Company’s obligations under the Revolving Credit Facility and the letter of credit sub-facility (described in Note 9) with SVB are secured by substantially all of its assets excluding its intellectual property. The Company may, subject to certain customary conditions, on one or more occasions increase commitments under the Revolving Credit Facility in an amount not to exceed $90.0 million in the aggregate (the “Incremental Facility”). Each Lender will have discretion to determine whether it will participate in any Incremental Facility.
Borrowings under the Revolving Credit Facility will accrue interest at rates equal, at the Company’s election, to (i) the applicable secured overnight financing rate (“SOFR”), plus the applicable margin for such loans, or (ii) the alternate base rate (“ABR”), which is defined as the highest of (a) the prime rate in effect from time to time, (b) the federal funds effective rate in effect from time to time plus 0.50%, and (c) the adjusted term SOFR for a one (1) month tenor in effect from time to time plus 1.0%, plus the applicable margin for such loans. The applicable margin for borrowings bearing interest on the SOFR ranges from 2.00% to 2.75%, and the applicable margin for borrowings bearing interest based on the ABR ranges from 1.00% to 1.75%. As of September 30, 2023, the applicable interest rate under the revolving credit facility was 7.52%. The Company will pay a quarterly commitment fee during the term of the Credit Agreement for the non-use of available funds ranging from 0.25% to 0.35%. In addition, the Credit Agreement provides a mechanism to determine a successor reference rate to the applicable reference rate if, among other things, the applicable reference rate becomes unavailable or is generally replaced as a benchmark interest rate.
The Credit Agreement contains customary representations and warranties as well as customary affirmative and negative covenants. Negative covenants include, among others, limitations on incurrence of indebtedness, liens, disposition of property and investments by the Company and its subsidiaries. In addition, the Credit Agreement requires the Company to maintain certain interest coverage, leverage and senior leverage ratios. To date, the Company is in compliance with the affirmative and negative covenants.
The Credit Agreement contains customary events of default. Upon the occurrence and during the continuance of an event of default, the Lenders may declare the outstanding advances and all other obligations under the Credit Agreement immediately due and payable.
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The Company may use amounts borrowed under the Credit Agreement for general corporate purposes or working capital financing. The Company may borrow additional amounts under the Credit Agreement from time to time as opportunities and needs arise. As of September 30, 2023, the Company has not drawn down on the credit facility.
Following the SVB closure by the California Department of Financial Protection and Innovation on March 10, 2023, and its subsequent receivership by the Federal Deposit Insurance Corporation (“FDIC”), the FDIC announced that all of SVB’s deposits and substantially all of its assets had been transferred to a newly created, full-service FDIC-operated bridge bank, Silicon Valley Bridge Bank N.A. (“SVBB”). On March 27, 2023, First Citizens Bank & Trust Company (“First Citizens”) acquired substantially all of the loans and certain other assets of the former SVB, and assumed all customer deposits and certain other liabilities of the former SVB. As such First Citizen assumed SVB’s obligations under the Credit Agreement.
Note 6 – Leases
Operating lease cost is recognized on a straight-line basis over the lease term. Finance lease cost is recognized as a combination of the amortization expense for the right-of-use assets and interest expense for the outstanding lease liabilities, and results in a front-loaded expense pattern over the lease term. Short-term and variable lease costs are not material to the Company’s condensed consolidated financial statements.
The components of lease cost were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Operating lease cost$1,882 $1,759 $5,550 $5,059 
Finance lease cost47 47 142 144 
Total lease cost$1,929 $1,806 $5,692 $5,203 
As of September 30, 2023, a weighted average discount rate of 3.26% and 2.24% has been applied to the remaining operating and finance lease payments, respectively, to calculate the lease liabilities included within the condensed consolidated balance sheets. The weighted average remaining lease term of operating and finance leases is 4.0 and 4.5 years, respectively, as of September 30, 2023.
As of September 30, 2023, the maturities of lease liabilities under operating and finance leases were as follows (in thousands):
Operating LeasesFinance LeasesTotal
Remainder of 2023$1,665 $35 $1,700 
20246,565 145 6,710 
20255,129 149 5,278 
20265,339 153 5,492 
20274,254 158 4,412 
Thereafter993 41 1,034 
Total minimum lease payments23,945 681 24,626 
Less: imputed interest(1,469)(33)(1,502)
Total present value of lease liabilities$22,476 $648 $23,124 
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Note 7 – Business Combination
On September 16, 2022, the Company acquired all outstanding stock of ConsultMates, Inc. (dba “Martin”), a media measurement and reporting platform, for $30.8 million. The acquisition is in response to growing demand from the Company’s buy-side customers for enhanced tools to take advantage of the Company’s global omnichannel inventory, including market-leading addressability solutions and innovative technology to enable supply path optimization. The assets acquired and liabilities assumed were recorded at fair value. The purchase price excludes $14.2 million of post-acquisition cash compensation arrangements for certain key acquired employees to be paid ratably over three years following the closing of the acquisition (subject to forfeiture upon termination). The purchase price was attributed to $7.9 million of developed technology intangible assets, $1.0 million of customer relationship intangible assets, $23.3 million of goodwill, $1.1 million of deferred tax liabilities, and $0.3 million of net liabilities assumed. The goodwill recognized was primarily attributable to the assembled workforce and the expected synergies from integrating Martin’s technology into the Company’s platform. Goodwill is not expected to be deductible for tax purposes. The financial results of Martin are included in the Company’s condensed consolidated financial statements from the date of acquisition. Separate operating results and pro forma results of operations for Martin have not been presented as the effect of this acquisition was not material to the Company’s financial results.
Note 8 - Acquisition-related Intangible Assets, Net
Acquisition-related Intangible Assets, Net
Acquisition-related intangible assets, net consisted of the following (in thousands):
September 30, 2023
Gross Carrying AmountAccumulated AmortizationNet Carrying Amount
Developed technology$7,900 $1,641 $6,259 
Customer relationships1,000 1,000  
Total acquisition-related intangible assets$8,900 $2,641 $6,259 
December 31, 2022
Gross Carrying AmountAccumulated AmortizationNet Carrying Amount
Developed technology$7,900 $456 $7,444 
Customer relationships1,000 145 855 
Total acquisition-related intangible assets$8,900 $601 $8,299 
The weighted average remaining useful life of developed technology was 4 years as of September 30, 2023. Amortization expense related to acquisition-related intangibles was $0.4 million and $0.1 million for the three months ended September 30, 2023 and 2022, respectively, and $2.0 million and $0.1 million for the nine months ended September 30, 2023 and 2022, respectively.
As of September 30, 2023, estimated future amortization expense for acquisition-related intangible assets was as follows (in thousands):
Remainder of 2023$395 
20241,580 
20251,580 
20261,580 
20271,124 
     Total estimated future amortization expense for acquisition-related intangible assets$6,259 
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Note 9 – Commitments and Contingencies
Purchase Obligations
The Company’s purchase obligations primarily relate to minimum contractual payments due to data center providers. During the three and nine months ended September 30, 2023, there were no material changes to the Company’s non-cancelable purchase obligations disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Letters of Credit
As of September 30, 2023 and December 31, 2022, the Company had two irrevocable letters of credit outstanding related to non-cancelable facilities leases in the amounts of $3.5 million and $0.5 million, with annual automatic renewal and final expiration dates in July 2028 and April 2025, respectively.
Legal Matters
From time to time, the Company is or may be involved in various claims and other legal matters arising in the normal course of business. The Company records an accrual for a liability relating to claims and other legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any such accruals are reviewed at least quarterly and adjusted for the impacts of negotiations, rulings, settlements, and other information or events pertaining to a particular matter, or on the advice of legal counsel. To date, the Company has not incurred a material loss, or a material loss in excess of a recorded accrual, with respect to any claims and other legal matters arising in the normal course of business. However, the outcomes of claims and other legal matters are inherently unpredictable and subject to significant uncertainties. If the Company subsequently concludes that there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred, and the amount of such additional loss would be material, the Company will either disclose the estimated additional loss or state that such an estimate cannot be made.
Indemnification
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnification. The Company’s exposure under these agreements is unknown because it involves future claims that may be made against the Company but have not yet been made. To date, the Company has not paid any material claims or been required to defend any actions related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations. In addition, the Company has indemnification agreements with certain of its directors and executive officers that require it, among other things, to indemnify them against certain liabilities that may arise due to their status or service as directors or officers of the Company. The terms of such obligations may vary.
Note 10 – Stockholders’ Equity and Equity Incentive Plans
Share Repurchases
In February 2023, the Company’s board of directors authorized the Company to repurchase up to $75 million of its Class A common stock (“2023 Repurchase Program”). As of September 30, 2023, $35.9 million remains available for repurchases. Shares are repurchased in a manner deemed in the best interest of the Company and its stockholders, dependent upon business, economic and market conditions, corporate and regulatory requirements, prevailing stock prices and other considerations.
In accordance with the authorization of the Company’s board of directors, during the three and nine months ended September 30, 2023, the Company repurchased 1,061,762 and 2,647,958 aggregate shares of Class A common stock for $15.6 million and $39.1 million, respectively.
Repurchases are executed from time to time, subject to general business and market conditions and other investment opportunities, through open market purchases or privately negotiated transactions, in accordance with Rule 10b-18 and/or Rule 10b5-1 of the Exchange Act. The 2023 Repurchase Program is scheduled to terminate on December 31, 2024.
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Equity Incentive Plans
The Company maintains the 2020 Equity Incentive Plan (“2020 Plan”), pursuant to which the Company may grant stock options, restricted stock awards, stock appreciation rights, restricted stock units (“RSUs”), deferred stock units (“DSUs”) performance awards, and stock bonus awards. As of September 30, 2023, the Company has reserved 6,679,859 shares of Class A common stock for the issuance of awards under the 2020 Plan. These available shares will increase automatically on January 1 for each of the first ten calendar years during the term of the 2020 Plan by the number of shares equal to the lesser of five percent (5%) of the aggregate number of outstanding shares of all classes of the Company’s common stock outstanding as of the immediately preceding December 31, or a number as may be determined by the Company’s board of directors or compensation committee. No new awards were issued under the Company’s prior 2006 Plan or 2017 Plan (“Prior Plans”) after the effective date of the 2020 Plan. To the extent outstanding awards under the 2006 Plan and the 2017 Plan are forfeited, expire unexercised, or would otherwise have been returned to the share reserve under the Prior Plans, the shares of Class B common stock subject to such awards instead will be available for future issuance as Class A common stock under the 2020 Plan.
Stock Options
The following table summarizes stock option activity and related information under the Company’s equity incentive plans:
Stock Options
Number of Shares Underlying Outstanding Options
(in thousands)
Weighted-Average Exercise PriceWeighted Average Remaining Contractual Term (Years)Aggregate Intrinsic Value (in thousands)
Outstanding as of December 31, 20226,476 $7.38 6.10$55,516 
Options granted1,375 15.33 
Options exercised(468)2.59 
Options canceled(166)16.67 
Options expired(16)32.99 
Outstanding as of September 30, 20237,201 $8.94 6.03$46,903 
Vested and exercisable as of September 30, 20235,453 $6.25 5.20$44,813 
As of September 30, 2023, unrecognized stock-based compensation of $17.1 million related to unvested stock options will be recognized on a straight-line basis over a weighted average period of 2.42 years.
Restricted Stock Units
The following table summarizes RSU activity and related information under the Company’s 2020 Plan:
RSUs
Number of Shares
(in thousands)
Weighted-Average Grant Date Fair Value per Share
Unvested as of December 31, 20221,582 $26.49 
Granted2,357 $15.97 
Vested(618)$22.67 
Canceled or forfeited(313)$18.54 
Unvested as of September 30, 20233,008 $19.86 
As of September 30, 2023, unrecognized stock-based compensation of $54.2 million related to unvested RSUs will be recognized on a straight-line basis over a weighted average period of 2.82 years.
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2020 Employee Stock Purchase Plan
In November 2020, the Company’s board of directors adopted, and its stockholders approved, the 2020 Employee Stock Purchase Plan (“ESPP”), which became effective in connection with the Company’s initial public offering. A total of 500,000 shares of the Company’s Class A common stock were initially reserved for issuance under the ESPP.
The aggregate number of shares reserved for issuance under the ESPP will increase automatically on January 1st of each of the first ten calendar years during the term of the ESPP by the number of shares equal to the lesser of (a) 1% of the total outstanding shares of all classes of the Company’s common stock as of the immediately preceding December 31, and (b) such number of shares of common stock as determined by the Company’s board of directors. The aggregate number of shares issued over the term of the ESPP may not exceed 7,500,000 shares of Class A common stock. As of September 30, 2023, the Company had reserved 464,796 shares of its Class A common stock for issuance under the ESPP.
Under the ESPP, Class A common stock will be purchased for the accounts of employees participating in the ESPP on each purchase date at a price per share equal to 85% of the lesser of: (a) the fair market value on the offering date or (b) the fair market value on the purchase date. The ESPP provides for, at maximum, 27 month offering periods and each offering period may consist of one or more six-month purchase periods, whereby the latest offering period commenced on June 1, 2022, and the offering periods thereafter consist of two six-month purchase periods ending May 31, 2023. As of September 30, 2023, $0.7 million has been withheld on behalf of employees for a future purchase under the ESPP due to the timing of payroll deductions and is included in accrued liabilities. For the nine months ended September 30, 2023, there were 65,092 shares of our Class A common stock purchased under the ESPP.
As of September 30, 2023, unrecognized stock-based compensation expense related to the ESPP was $0.7 million, which is expected to be recognized over a weighted-average period of 0.67 years.
Stock-Based Compensation
Total stock-based compensation expense recognized in the condensed consolidated statements of operations was as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Cost of revenue$387 $256 $1,089 $861 
Technology and development1,112 683 3,209 2,467 
Sales and marketing2,550 1,735 7,873 5,740 
General and administrative3,151 1,981 9,354 6,114 
Total stock-based compensation expense7,200 4,655 21,525 15,182 
Tax benefit from stock-based compensation(1,397)(1,245)(4,105)(2,951)
Total stock-based compensation expense, net of tax effect$5,803 $3,410 $17,420 $12,231 
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Note 11 – Net Income (Loss) Per Share Attributable to Common Stockholders
The Company has two classes of common stock, Class A and Class B. Basic and diluted earnings per share (“EPS”) attributable to common stockholders for Class A and Class B common stock were the same because they were entitled to the same liquidation and dividend rights.
The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share (in thousands, except per share data):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Numerator:
Net income (loss) attributable to common stockholders – basic$1,774 $3,326 $(9,821)$15,924 
Denominator:
Weighted average shares outstanding – basic51,638 52,436 52,132 52,169 
Options to purchase common stock4,000 4,489  4,701 
Restricted stock222 19  10 
Employee stock purchase plan shares119   15 
Weighted average shares outstanding – diluted55,979 56,944 52,132 56,895 
Net income (loss) per share attributable to common stockholders – diluted$0.03 $0.06 $(0.19)$0.28 
The following weighted-average outstanding shares of common stock equivalents were excluded from the computation of diluted net income (loss) per share attributable to common stockholders for the periods presented because including them would have been anti-dilutive:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Options to purchase common stock
2,2691,0602,1341,008
Unvested restricted stock units6691,2841,3371,096
ESPP1345066
Total common stock equivalents excluded from net income per share attributable to common stockholders – diluted
2,9382,4783,5212,170
Note 12 – Income Taxes
The Company has historically calculated the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate ("AETR") for the full fiscal year to “ordinary” income or loss (pretax income or loss excluding unusual or infrequently occurring discrete items) for the reporting period. The discrete effective tax rate method has been used to calculate taxes for the fiscal three and nine months ended September 30, 2023. The Company has determined that since small changes in estimated “ordinary” income would result in significant changes in the estimated AETR, the historical method would not provide a reliable estimate for the fiscal three and nine months ended September 30, 2023.
The Company recorded a provision for income taxes of $0.1 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, and an income tax benefit of $2.7 million and provision for income taxes of $4.7 million for the nine months ended September 30, 2023 and 2022, respectively.
The effective income tax rate was 6% and 30% for the three months ended September 30, 2023 and 2022, respectively, and 22% and 23% for the nine months ended September 30, 2023 and 2022, respectively. The income tax provision for the three months ended September 30, 2023 is related to the net tax benefit primarily related to the 2022 federal tax provision to return adjustments resulting from guidance under the Internal Revenue Service notice 2023-63 and the requirement to capitalize and amortize certain research and development costs under the U.S. Tax Cuts and Jobs Act for 2022 and 2023 tax years, an increase in research tax credits, offset by a decrease in the GILTI provision. The income tax benefit for the nine months ended September 30, 2023 is mainly from foreign-derived intangible income (FDII), research tax credit, and 2022 federal tax provision to return adjustments that were classified as a change in estimate, offset by an increase in tax expense primarily related to nondeductible stock-based compensation, and Section 162(m) limitation on the tax deductibility of officers’ compensation.
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Realization of the Company’s deferred tax assets is dependent primarily on the generation of future taxable income. In considering the need for a valuation allowance, the Company considers its historical, as well as future projected, taxable income along with other objectively verifiable evidence. Objectively verifiable evidence includes the Company’s realization of tax attributes, assessment of tax credits, and utilization of net operating loss carryforwards during the year.
Note 13 – Segment Information
The following table presents total revenue by geographic area based on the publisher’s billing address (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
United States$38,077 $40,780 $108,608 $111,826 
EMEA19,686 16,525 57,345 48,210 
APAC4,655 6,456 13,117 19,352 
Rest of the world1,259 739 3,344 2,696 
Total$63,677 $64,500 $182,414 $182,084 
The following table presents long-lived assets, net, which consist primarily of property and equipment and operating lease right-of-use assets, by geographic area (in thousands):
September 30,
2023
December 31,
2022
United States$69,240 $80,021 
Rest of the world14,443 17,341 
Total$83,683 $97,362 
Note 14 – 401(k) Plan
The Company has a 401(k) Savings Plan (the “401(k) Plan”) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, participating employees may elect to contribute up to 100% of their eligible compensation, subject to certain limitations. The 401(k) Plan provides for a discretionary employer matching contribution. The Company made $1.0 million and $0.9 million in matching contributions to the 401(k) Plan for the nine months ended September 30, 2023 and 2022, respectively.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally are identified by the words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect,” and similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make regarding our ability to maintain our growth and profitability, our ability to attract and retain publishers, and our expectations concerning the advertising industry.
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this Quarterly Report on Form 10-Q may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Quarterly Report on Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2021 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”).
Overview
We are an independent technology company seeking to maximize customer value by delivering digital advertising’s supply chain of the future. Our sell-side platform empowers the world’s leading digital content creators across the open internet to control access to their inventory and increase monetization by enabling marketers to drive ROI and reach addressable audiences across ad formats and devices. Since 2006, our infrastructure-driven approach has allowed for the efficient processing and utilization of data in real time. By delivering scalable and flexible programmatic innovation, we improve outcomes for our customers while championing a vibrant and transparent digital advertising supply chain.
Our specialized cloud infrastructure platform provides superior monetization for publishers by increasing the value of an impression and providing incremental demand through our deep and growing relationships with buyers. We are aligned with our publisher and app developer partners by being independent. We do not own media and therefore do not have a vested interest in driving ad revenue to specific media properties. Our global platform is omnichannel, supporting a wide array of ad formats and digital device types, including mobile app, mobile web, desktop, display, video, over-the-top (“OTT”), connected television (“CTV”), and rich media.
In September 2023, our platform efficiently processed approximately 627 billion ad impressions daily, each in a fraction of a second. As of September 30, 2023, we served over 1,750 publishers and app developers representing over 95,000 individual domains and apps worldwide on our platform across a diverse group of content verticals such as news, e-commerce, gaming, media, weather, fashion, technology, and more, including many of the leading digital companies such as Yahoo, formerly Verizon Media Group, and News Corp. Our net dollar-based retention rate of 97% for the trailing twelve months ended September 30, 2023 decreased from 120% for the trailing twelve months ended September 30, 2022, primarily due to a decline in run rate from one of our publishers.
We generate revenue from publishers primarily through revenue share agreements, generally one-year contracts that renew automatically for successive one-year periods, unless terminated prior to renewal. We primarily work with publishers and app developers who allow us direct access to their ad inventory, as well as select channel partners that meet our quality and scale thresholds. We refer to our publishers, app developers, and channel partners collectively as our publishers.
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We enter into written service agreements with our DSP buyers that allow them to use our platform to buy ad inventory, however substantially all of our revenues are earned from our publishers. Our platform service agreements with DSPs generally have one-year terms that renew automatically for successive one-year periods, unless terminated prior to renewal. We also negotiate Supply Path Optimization (“SPO”) agreements with agencies and advertisers that encourage these buyers to spend a higher share of their advertising budgets on our platform. SPO agreements typically have a one-year term and renewal terms are generally discussed one quarter prior to a new term. The effect of these SPO agreements is to increase the volume of ad spend on our platform without corresponding increases in technology costs.
In the third quarter of 2023, mobile (including mobile video) and video (including OTT/CTV) combined comprised approximately 76% of our revenue. We anticipate mobile to continue increasing as a percentage of our total impressions and revenue in the future. We further expect video to constitute an increasingly important component of our business.
Macroeconomic Factors and COVID-19
Ongoing interest rate increases, foreign currency fluctuation, persistent inflation in the U.S. and other markets globally, the conflicts in Ukraine and Israel, recent turmoil in the global banking and finance system and lingering effects of the COVID-19 pandemic, including the global slowdown of economic activity and disruptions to the advertising and marketing activities, may increase the risk of economic volatility and dislocation in the capital or credit markets in the U.S. or globally. To date, we have not observed material impacts in our business or outlook, but we intend to continue to monitor macroeconomic conditions closely and may determine to take certain financial or operational actions in response to such conditions to the extent our business begins to be adversely impacted.
See “Risk Factors” for further discussion of the risks related to the COVID-19 pandemic, inflation, rising interest rates, and foreign currency fluctuations on our business.
Business Highlights
The table below summarizes the financial highlights of our business performance:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(in thousands)
Revenue$63,677 $64,500 $182,414 $182,084 
Operating income (loss)(2)
$(571)$9,622 $(18,377)$23,997 
Net income (loss)(2)
$1,774 $3,326 $(9,821)$15,924 
Adjusted EBITDA(1)(2)
$18,240 $25,137 $36,403 $65,192 
Net cash provided by operating activities
$23,845 $28,072 $52,447 $67,854 
_______________
(1)For a definition of Adjusted EBITDA, an explanation of our management’s use of this measure, and a reconciliation of Adjusted EBITDA to net income, see “Non-GAAP Financial Measure.”
(2)Amounts for the nine months ended September 30, 2023 include a provision for bad debt of $5.7 million relating to a Demand Side Platform (“DSP”) buyer of our platform that filed for Chapter 11 bankruptcy.
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Key Factors Affecting Our Performance
We believe our growth and financial performance are dependent on many factors, including those described below.
Growing access to valuable ad impressions
Our recent results have been driven by a variety of factors including increased access to mobile web (display and video) and mobile app (display and video) impressions and desktop video impressions. Our performance is affected by our ability to maintain and grow our access to valuable ad impressions from current publishers as well as through new relationships with publishers. The number of ad impressions processed on our platform was approximately 56.0 trillion and 42.1 trillion for the three months ended September 30, 2023 and 2022, respectively.
Monetizing ad impressions for publishers and buyers
We focus on monetizing digital impressions by coordinating daily over a hundred billion real-time auctions and nearly a trillion bids globally, using our specialized cloud software, machine learning algorithms, and scaled transaction infrastructure. Valuable ad impressions are transparent and data rich, viewable by humans, and verifiable. Each ad impression we auction consists of over 549 independent data parameters, which can yield valuable insights if recorded and analyzed properly. This processing of voluminous data for each ad impression must occur in less than half a second as consumers expect a seamless digital ad experience. By deploying our specialized software and hardware and continuously optimizing our machine learning algorithms, we are able to derive superior outcomes by increasing advertiser return on investment (“ROI”) and publisher revenue, while increasing the cost efficiency of our platform and our customers’ businesses. We continually assess impressions from new and existing publishers through a rigorous validation process. We add or remove impressions from our platform based on an assessment of the projected value of the impressions, which is influenced by the type of publisher and its related consumers, as well as the potential volume of monetizable impressions and ad format types, such as digital video. We continuously create and iterate algorithms that leverage vast datasets flowing through our infrastructure to improve the liquidity in our marketplace. Our ability to drive successful outcomes in the real-time auction process on behalf of our publishers and buyers will affect our operating results.
Identifying valuable ad impressions that we can profitably monetize at scale
We continuously review our available inventory from existing publishers across every format (mobile, desktop, digital video, OTT, CTV, and rich media). The factors we consider to determine which impressions we process include transparency, viewability, and whether or not the impression is human sourced. By consistently applying these criteria, we believe that the ad impressions we process will be valuable and marketable to advertisers. In addition, using a combination of proprietary analysis driven by machine learning algorithms that are continuously updated along with specialized third-party tools, we aim to exclude low value impressions from our platform and, in some cases, may suspend certain publishers, or particular publisher sites and apps, from using our platform if they do not meet our standards. Our confidence in our ability to achieve our quality goals is backed by a fraud-free guarantee to all of our buyers which we introduced in 2017. We believe that this rigorous commitment to quality helps us maintain our reputation as a leader in the programmatic advertising ecosystem. Our financial performance depends in part on how efficiently and effectively we can conduct these activities at scale.
Increasing revenue from publishers and advertising spend from buyers
We leverage our extensive platform capabilities and the subject matter expertise of our team members to grow revenue from our publishers and increase advertising spending from our buyers. Our sales and marketing team includes customer success pods to enhance customer knowledge and implementation of best practices. Once we onboard a new customer, we seek to expand our relationship with existing publishers by establishing multiple header bidding integrations by leveraging our omnichannel capabilities to maximize our access to publishers’ ad formats and devices, and expanding into the various properties that a publisher may own around the world. We may also up-sell additional products to publisher customers including our header bidding management, identity, and audience solutions. We automate workflow processes whenever feasible to drive predictable and value-added outcomes for our customers and increase productivity of our organization.
Net dollar-based retention rate is an important indicator of publisher satisfaction and usage of our platform, as well as potential revenue for future periods. We calculate our net dollar-based retention rate at the end of each quarter for a cumulative twelve months. We calculate our net dollar-based retention rate by starting with the revenue from publishers in the prior trailing twelve-month period (“Prior Period Revenue”). We then calculate the revenue from these same publishers in the current trailing twelve-month period (“Current Period Revenue”). Current Period Revenue includes any upsells and is net of contraction or attrition, but excludes revenue from new publishers. Our net dollar-based retention rate equals the Current Period Revenue divided by Prior Period Revenue. Our net dollar-based retention rate was 97% for the trailing twelve months ended September 30, 2023 and 120% for the trailing twelve months ended September 30, 2022.
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We work with DSPs to help them reduce their costs and improve advertiser ROI, which in turn makes us the specialized cloud infrastructure platform of choice for many of our buying partners. As buyers increasingly consolidate their spending with fewer larger technology platforms, we seek to bring an increased proportion of their digital ad spending to our platform through direct deals. We have entered into SPO agreements directly with buyers, advertisers and agencies through various arrangements ranging from custom data and workflow integrations, product features, and volume-based business terms. The effect of these SPO agreements is to increase the volume of ad spend on our platform without corresponding increases in technology costs.
Managing industry dynamics
We operate in the rapidly evolving digital advertising industry. Due to the scale and complexity of the digital advertising ecosystem, direct sales via manual, person-to-person processes are insufficient for delivering a real-time, personalized ad experience, creating the need for programmatic advertising. In turn, advances in programmatic technologies have enabled publishers to auction their ad inventory to more buyers, simultaneously, and in real time through a process referred to as header bidding. Header bidding has also provided advertisers with transparent access to ad impressions. As advertisers keep pace with ongoing changes in the way that consumers view and interact with digital media there will be further innovation and we anticipate that header bidding will be extended into new areas such as OTT/CTV. We believe our focus on publishers and buyers has allowed us to understand their needs and our ongoing innovation has enabled us to quickly adapt to changes in the industry, develop new solutions and do so cost effectively. Our performance depends on our ability to keep pace with industry changes such as header bidding and the evolving needs of our publishers and buyers while continuing our cost efficiency.
Expanding and managing investments
We make software and hardware infrastructure investment decisions to meet expected increases in ad impressions on both a global and regional data center level throughout the calendar year based on the projected quantity, ad format type, and associated data requirements. In parallel, we seek to continuously improve our infrastructure utilization. Our ability to identify and monetize high value impressions allows us to operate more efficiently because the cost of processing low-value impressions and high-value impressions are approximately the same. We believe that increasing utilization of our platform leads to improved outcomes for our customers and more efficient and effective operations for us. To achieve improved utilization, we leverage the data on our platform through extensive application of artificial intelligence technologies, including machine learning and natural language processing. The magnitude and timing of our investments in our software and hardware may lead to fluctuations in our operating results.
Expanding internationally
We plan to continue expanding our international presence and making additional investments in sales and marketing and infrastructure to support our long-term growth and to position ourselves for expected increases in the penetration of programmatic advertising globally. We expect programmatic advertising to grow at different rates in different geographic markets. Our publishers outside of the United States typically have smaller amounts of programmatic inventory, and as a result, our sales and marketing expenses associated with non-U.S. publishers are generally proportionally higher. We are constantly evaluating new markets with a strategy to use our existing infrastructure and adjacent sales offices, or by expanding our infrastructure footprint and placing personnel directly in those markets. Our ability to efficiently expand into new markets will affect our operating results.
Managing seasonality
The global advertising industry experiences seasonal trends that affect the vast majority of participants in the digital advertising ecosystem. Most notably, advertisers have historically spent relatively more in the fourth quarter of the calendar year to coincide with the holiday shopping season, and relatively less in the first quarter. We expect seasonality trends to continue, and our ability to manage our resources in anticipation of these trends will affect our operating results.
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Non-GAAP Financial Measure
In addition to our results determined in accordance with U.S. generally accepted accounting principles (“GAAP”), including, in particular, operating income (loss), net cash provided by operating activities, and net income (loss), we believe that Adjusted EBITDA, a non-GAAP measure, is useful in evaluating our operating performance. We define Adjusted EBITDA as net income (loss) adjusted for stock-based compensation expense, depreciation and amortization, unrealized gain, loss or impairment of equity investment, interest income, acquisition-related and other expenses, and provision for (benefit from) income taxes.
The following table presents a reconciliation of Adjusted EBITDA to net income (loss) for each of the periods indicated:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(in thousands)(in thousands)
Net income (loss)(2)
$1,774 $3,326 $(9,821)$15,924 
Add back (deduct):
Stock-based compensation7,200 4,655 21,525 15,182 
Depreciation and amortization11,401 9,082 33,731 23,587 
Unrealized loss and impairment of equity investment
— 6,405 — 5,948 
Interest income(2,246)(596)(6,313)(1,044)
Acquisition-related and other expenses (1)
— 867 — 867 
Provision for (benefit from) income taxes111 1,398 (2,719)4,728 
Adjusted EBITDA$18,240 $25,137 $36,403 $65,192 
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(1)We exclude acquisition-related and other expenses incurred in connection with our acquisition of Martin from Adjusted EBITDA because we do not believe such expenses are reflective of our ongoing core operations. Acquisition-related expenses incurred in connection with our acquisition of Martin include third-party transaction costs. Beginning in the third quarter fiscal 2023, we no longer exclude the impact of post-acquisition cash compensation arrangements for certain key acquired employees from our Adjusted EBITDA calculation. We have updated prior period results for comparability. For additional information, see Note 7, “Business Combination” to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
(2)Amounts for the nine months ended September 30, 2023 include a provision for bad debt of $5.7 million relating to a DSP buyer of our platform that filed for Chapter 11 bankruptcy.
Although Adjusted EBITDA is used by many investors and securities analysts in their evaluations of companies, it has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our results of operations as reported under GAAP. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
Key Components of Our Results of Operations
Revenue
We generate revenue from publishers who use our platform. Our platform allows publishers to sell, in real time, customized ad inventory to buyers and provides automated inventory management and monetization tools to publishers across various device types and digital ad formats. We generate revenue primarily through fees charged to our publishers, which are generally a percentage of the value of the advertising impressions that publishers monetize on the platform. We report revenue on a net basis. This represents gross billings to buyers, net of amounts we pay publishers. We record our accounts receivable at the amount of gross billings to buyers, net of allowances, for the amounts we are responsible to collect, and we record our accounts payable at the net amount payable to publishers. Accordingly, both accounts receivable and accounts payable appear large in relation to revenue, which is reported on a net basis.
Our revenue recognition policies are discussed in more detail under “Critical Accounting Policies and Estimates.”
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Cost of Revenue
Cost of revenue consists of data center co-location costs, depreciation expense related to hardware supporting our platform, amortization expense related to capitalized internal-use software development costs, personnel costs, and allocated facilities costs. Personnel costs include salaries, bonuses, stock-based compensation, and employee benefit costs, and are primarily attributable to our cloud operations group, which maintains our servers, and our client operations group, which is responsible for the integration of new publishers and buyers and providing customer support for existing customers. We expect cost of revenue to generally increase in absolute dollars in future periods.
Operating Expenses
Technology and Development. Technology and development expenses consist of personnel costs, including salaries, bonuses, stock-based compensation, and employee benefits costs, allocated facilities costs, and professional services. These expenses include costs incurred in the development, implementation and maintenance of internal-use software, including platform and related infrastructure. We expend technology and development costs as incurred, except to the extent that such costs are associated with internal-use software development that qualifies for capitalization. We expect technology and development expenses to generally increase in absolute dollars in future periods.
Sales and Marketing. Sales and marketing expenses consist of personnel costs, including salaries, bonuses, stock-based compensation, and employee benefits costs, for our employees engaged in sales, sales support, marketing, business development, and customer relationship functions. Sales and marketing expenses also include expenses related to promotional, advertising and marketing activities, allocated facilities costs, travel, and entertainment primarily related to sales activity and professional services. We expect sales and marketing expenses to increase in absolute dollars in future periods.
General and Administrative. General and administrative expenses consist of personnel costs, including salaries, bonuses, stock-based compensation, and employee benefits costs for our executive, finance, legal, human resources, information technology, and other administrative employees. General and administrative expenses also include outside consulting, legal and accounting services, allocated facilities costs, and travel and entertainment primarily related to inter-office travel and conferences.
Total Other Income (expense), Net
Total other income (expense), net consists of interest income, unrealized loss on equity investment and other income (expense), net. Interest income is generated by investing excess cash into money market accounts and marketable securities. Unrealized loss on equity investment consists of loss on our investment in an equity security. Other income (expense), net consists primarily of gains and losses from foreign currency exchange transactions.
We believe that investment gains and losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
Provision for (Benefit from) Income Taxes
The provision for (benefit from) income taxes consists primarily of federal, state, and foreign income taxes. Our income tax provision (benefit) may be significantly affected by changes to our estimates for tax in jurisdictions in which we operate and other estimates utilized in determining the global effective tax rate. Actual results may also differ from our estimates based on changes in economic conditions. Such changes could have a substantial impact on the income tax provision. We reevaluate the judgments surrounding our estimates and make